Question

Two 1000 dollar face value bonds are both redeemable at par, with the first having a redemption date 3 years prior to the redemption date of the second. Both are bought to yield 11.2 percent convertible semiannually. The first bond sells for 804.44 dollars and pays coupons at 7.9 percent convertible semiannually. The second bond pays coupons at 5 percent per half year. What is the price of the second bond?

Answer 1

To find the price of the second bond, we must calculate the present value of its future cash flows, discounted at the investor's required yield of 11.2% semiannually. The redemption date for the second bond was not given, so assume it follows a similar calculation method as the first bond, using the provided interest and discount rates.

Step-by-step explanation:

To determine the price of the second bond, we start by understanding that bonds are priced to reflect their present value, taking into account the time value of money and risk factors. The first bond, with an interest rate of 7.9% convertible semiannually, was bought for $804.44 to yield 11.2% convertible semiannually. Given the details for the second bond which pays a higher coupon rate of 5% per half year, to calculate its price, we must consider the yield required by the investor at 11.2% semiannually.

The present value of the bond's cash flows, which include semiannual interest payments and the redemption at par value, must be calculated. This is done by discounting each of the cash flows back to their present value at the required yield. The sum of these present values will provide the price of the bond.

As the student has not provided a redemption date for the second bond, it is assumed that the calculations for its price would follow a procedure where we find the present value of each coupon payment and the face value at maturity, using the yield to maturity as the discount rate.